May 29 (Bloomberg) -- In Warren Buffett, Burlington
Northern Santa Fe has one of the biggest safety nets in
corporate America. You wouldn’t know it from the way the
railroad’s bonds trade.

While Buffett’s Berkshire Hathaway Inc. doesn’t officially
guarantee debt of the railroad operator it bought in 2010, the
parent would still probably offer support to BNSF should
financial trouble arise, according to Joel Levington, who
follows industrial borrowers for Bloomberg Industries. That
means securities including BNSF’s $1 billion of 4.9 percent
notes due in 2044, which yield more than similar-maturity bonds
of lower-rated competitor Norfolk Southern Corp., may be cheap.

“The market is crediting it with very limited or no
support from the parent,” said Levington, who published
research on BNSF’s bonds this week. “But if you look at
Berkshire and its history, it’s always supported its
companies.”

That presents a challenge for bondholders seeking to
decipher the value of corporate connections without the benefit
of a legally binding promise. Following the $26.5 billion
acquisition of BNSF, the railroad company terminated a $1.2
billion credit facility, signaling it could potentially turn to
Berkshire for that type of funding if needed, according to
Levington.

Michael Trevino, a spokesman for BNSF, declined to comment
on the company’s bonds. Buffett didn’t respond to an e-mail sent
to an assistant.

‘Parent Support’

While BNSF’s finances are similar to other investment-grade
railroad borrowers, the company “compares better than average
in terms of its size and implicit parent support,” Jeff
Wichmann, an analyst at CreditSights Inc. with an “outperform”
recommendation on BNSF bonds, wrote in a May 5 report. Still,
“it’s hard to say exactly how the market treats the likelihood
of support,” he said yesterday.

Its April 2044 bonds issued in March and ranked A3 by
Moody’s Investors Service traded May 27 at 106.3 cents on the
dollar to yield 4.51 percent, according to Trace, the bond-price
reporting system of the Financial Industry Regulatory Authority.
That’s 0.15 percentage point more than the yield on Norfolk’s
$500 million of 4.8 percent debt due in 2043, which Moody’s
ranks a level lower at Baa1.

MidAmerican Assistance

Berkshire has previously helped a unit whose bonds lacked a
guarantee from the parent. In 2006, Buffett’s holding company
said it would allow its energy business, then called
MidAmerican, to request as much as $3.5 billion of capital to
repay debt.

That equity commitment was later extended and reduced
before expiring this year. The unit, now called Berkshire
Hathaway Energy, said in an April presentation that the
agreement “was allowed to expire as our standalone credit
metrics now support our credit ratings.” The business is ranked
A3 by Moody’s and BBB+ at S&P.

“If liquidity ever became an issue for Burlington,
something similar could likely be set up,” Wichmann said.
“They clearly don’t need it now.”

Cash Doubles

BNSF’s cash holdings have doubled to $2.56 billion since
Berkshire bought the company, whose track network is
concentrated west of the Mississippi River, pitting the company
against Union Pacific Corp. In September 2011, BNSF ended its
revolving credit facility a year before it was set to expire.
While losing the bank loan “effectively ended” its access to
the commercial paper market, BNSF said in a February 2012 filing
that the action wouldn’t materially affect its ability to manage
liquidity.

Debt also has increased, reaching a record $17.9 billion on
March 31, according to data compiled by Bloomberg. That’s the
most of any U.S. rail freight company, and one reason why the
bonds “trade a little bit cheap to the sector,” said Wichmann,
whose report estimated as much as $1.5 billion of new issuance
in the third quarter.

BNSF has been tapping credit markets as it boosts capital
spending. The railroad said in February that it planned a record
$5 billion outlay this year to buy locomotives and maintain
track as it hauls more crude oil drilled in shale fields. That
exceeds Union Pacific’s proposed $3.9 billion and is an increase
of about 25 percent over the goal set a year earlier.

Holding Forever

The railroad’s borrowings are primarily unsecured, and
Berkshire doesn’t guarantee any of BNSF’s debt, according to a
May 2 regulatory filing.

Berkshire, which held $49 billion of cash on March 31, has
acquired dozens of businesses since Buffett took control in 1965
and rarely sells assets. He has built Berkshire into a company
with a $315 billion market value that controls Dairy Queen,
Benjamin Moore and Geico.

It would make sense for Berkshire to support the railroad
operator if it needed help, said Bill Smead, chief investment
officer at Smead Capital Management, which oversees about $940
million including Berkshire shares. “If Dairy Queen’s
refrigerators were out, he’d stand behind it.”